ASI: Ads Success Index

Why is improving SEM profit so tough?

Until you have achieved a level of profitable conversions, you can pretty much use the conventional performance measures. But when you get past having profitable conversions, you run into some problems making decisions that will allow you to maximize your profitability. 

That's because scaling profitability is about trying lots of alternatives and deciding which ones will be the most profitable. But once you've created this array of alternatives, and experienced its corresponding results, it is not so easy to decide which ones deserve to be expanded, which ones deserve to be dropped, and which ones require bid or budget changes.

Why is that so difficult? Because...

• You will have to rank alternatives that vary in both volume and profitability. You are frequently faced with alternatives that vary simultaneously in both profitability and volume. Example: how would you go about choosing between two ads: one which yielded twice the business volume – while the smaller volume ad yielded business with half the expense (cost of clicks)?
• The eternal question for people managing Google PPC accounts: how do we measure and compare performance without complex formulas that have to be customized for every scenario? How do you go about defining “performance” in a universal way that is practical to apply yet reliable and valuable?
• You will have to be able to evaluate hundreds of such decisions each week about which markets, ad templates. landing page variations, keyword sets, etc? You're trying out a lot of alternatives (hundreds of city markets is a good example). And you will have to be able to determine which ones are working and which ones are not. Quickly and scientifically.

Introducing the ASI: Ads Success Index

The goal is to have one consistent measure of performance – in real profit terms. The idea behind the ASI is to create a simple calculation that can be applied to virtually any PPC performance “entity” for any time period. An index of profitability that will help to handle those tough choices (bullets above) and lead us to maximun profitability. Of course, that begs the question: how do we want to calculate an ASI? After experimentation with many (far more complex) formulae, we developed one such overall measure that we highly recommend: 

1. Take the profit margin you make off a conversion.
2. Multiply it times the number of conversions.
3. Subtract the cost of those conversions (clicks).
4. And divide that by the impressions.

Now why is this calculation so relevant?

Pretty simple. Sort of a net profit per impression calculation. You can see that this requires you to have a good understanding of all your conversion types and how to quantify them into marginal profit. Weaknesses or bias in those calculations will render this calculation useless very quickly.

1. This makes sense because the real goal of your search marketing is to maximize profit. Isn’t it? The impressions show you how well you’re getting potential customers to see your ads. The ASI tells you how well you’re "farming" that into profit.
2. The great thing about the ASI (defined in this particular way) is we can apply it to anything; not just to compare two ads in the same adgroup. And we can use that comparison to decide which ads, keywords, markets, time of day, audiences, etc. that work best.
3. So how big a set of impressions is required for meaning in this ASI dimension?  You have to have enough impressions to represent some conversions. If you are averaging one conversion per 200 impressions, would you think 1000 impressions without one conversion was significant? Probably. Would you think 400 impressions without a conversion was reason to change something? Probably not.

Let’s take a look at an example of how to apply the ASI

Let’s say that in your marketplace, a reasonable objective would be one conversion for every 200 impressions. And let’s say that the profit on that conversion was $200 (before Ads costs). 

• One way to get that conversion is by achieving a 10% click thru rate coupled with a 5% conversion rate. That conversion would require 20 clicks. If your cost per click was $5, that conversion would cost $100 and net out $100 profit.
• A better way to get that conversion is by targeting a 5% click thru rate coupled with a 10% conversion rate. That conversion would then only require 10 clicks and cost you $50 and net out $150 profit. Same 200 impressions. Same one conversion. $50 more profit. More targeted keywords and ads – so the CPC stayed about the same overall.

Your ASI would initially be +0.50, and then it would improve to +0.75 (in the above example) because of your improved conversion rate. Same one conversion per 200 impressions, but it’s 50% more profitable in real terms to your business because it took 10 fewer clicks to generate it. You were able to keep $150 profit instead of $100. 

Now we can quickly evaluate alternatives using the grid method

The grid method will help you apply your ASI systematically throughout your account. This will make improving and scaling your profitability a LOT easier.

Let’s take an example. Suppose we have a campaign “template” that we run in 100 major cities. And the goal is to figure out which cities are performing, which ones are not, and what to do with ones in the middle. The Y-axis could be the whole campaign together or just one particular ad (template) that we customize for each city. Or a keyword template. The X-axis would be the markets; the 100 cities.

In each “cell” (market/template intersection) let’s calculate the total impressions and the ASI for a period (say last 30 days). This grid method of reporting, with the “duet” of impressions and ASI, tells you everything you need to know about how a particular element or technique works across markets. Or, how a particular market performs across different ad templates. As long as you have a set of cells with the ASI/Impressions duet.

The impressions count shows you the “potential” that the element (keyword or campaign or ad) is creating and the ASI tells you how it is “farming” that potential. Scale and effectiveness. At a micro or macro level. That is the key to this ASI - impressions teamwork.

Simple rules that drive the right actions

With a little experience, you can develop your ads action plan based on these “grid-type” results. So, within a particular row or column, the performance of each “cell” of impressions-ASI data can be classified into four quadrants. The impressions are compared (high or low) on a relative basis (such as comparing ads for the same products) and the ASI is evaluated on an absolute basis relative to your goal or overall ASI performance.

The real magic of the grid type reporting is that you can make decisions with almost perfect profit perspective. How does that ad template work across markets? How does it work relative to other ad templates in the same markets? You can quickly see what is generating potential and what is happening with that potential.

So now you can take advantage of what’s working, kill off what is not, and adjust your approach for everything in between.